How Charitable Institutions are assessed for Income Tax?
Accumulation of surplus and utilization of NGO, Section 25 Company,
Charitable Trust and Society

Concept of Income of a Charitable Institution

Since the charitable trust or institution may be wholly or
partly religious or charitable in nature, various provisions
will be applicable to the activities or purposes which are
charitable or religious in nature. Section 12 firstly
excludes corpus donations from the ambit of income. Thus,
voluntary contributions received with a specific direction
that they shall form part of the corpus are to be excluded
from the definition of the term income. It may be noted here
that these contributions have to be used in accordance with
the directions of the donor. And secondly, the value of any
medical or educational service, by a trust etc. running an
educational institution or a hospital, to a person referred
to in section 13(3) of the Act will be deemed to be the
income of the trust or institution. If the beneficiary has
made any payment for such service, then such payment shall
be deducted from the value of the service in arriving at the
income.

Application of Income of a Charitable Trust or SocietySection 11 permits deduction of expenditure from income.
The expenditure incurred by a trust or institution by way of application of
income in India towards religious or charitable purposes, as per its Memorandum,
is deductible from the income. The assessee may also set apart and accumulate
15% of income for such application and such amount will also be taken as
expenditure of the year. These provisions are applicable mutatis-mutandis to a
partly religious or charitable trust. This section also permits deduction of
expenditure incurred outside India, provided that such application of income
promotes international welfare in which India is interested. However, for
deduction of such expenditure, prior approval of the Board is required. In
conformity with section 12, corpus donations constitute deductible expenditure
under section 11(1)(d)

Capital Gain of Charitable InstitutionSection 11(1A) of Income Tax Act have provisions deals with
Capital Gains arising or accruing to a charitable trust or
institution. The position of law is that if the whole of the
net consideration (Consideration minus the expenditure
incurred in connection with transfer) is applied towards
acquiring a new capital asset, then, the capital gains is
taken to have been applied for charitable or religious
purpose. However, if only a part of the net consideration is
applied for acquiring a new capital asset, then, the capital
gains to the extent of differences between amount so applied
and original cost of the asset is taken to be applied for
religious or charitable purpose. The provision applies
mutatis-mutandis where the capital asset is held partly for
religious or charitable purpose.

Accumulation of Income of Charitable InstitutionsAs per the Act apart from accumulation of 15% of income
permitted u/s 11(1) of the Act, a trust or institution is
permitted to accumulate or set apart income for specific
purpose (s) (emphasis supplied) u/s 11(2). The accumulation
and setting apart of income has to be for specific purpose
as distinguished from general purpose (s) mentioned in the
Memorandum.

We may refer to the following case in this
behalf:-
If the charitable institution did not utilized the specified
percentage of income in a particular year, Form 10 needs to
be filed with Income Tax Department.

Business Income of a Charitable Institute
As per Section 11(4) of Income Tax Act a business as a going concern
can be held as property under trust. Therefore, a legitimate claim
can be made that the income of such business may not be included in
the total income of the person receiving such income. In such a
case, the assessing officer is required to assess the income of such
business under the provisions of the Act. The difference between
income so determined and the income shown in accounts shall not be
deemed to have been applied towards religious or charitable purpose,
but applied to other purposes. The point to be noted is that the
income of the business has to be calculated under usual provisions
contained in Chapter IV-D and not as per Chapter III of the Act,
applicable to income of charitable trusts and institutions.

Incidental Business Income
Section 11(4A) of Income tax Act has provision related to income of
a trust or institution by way of a business, which is incidental to
attainment of its objects. The income of such a business will be
entitled to exemption u/s 11 if separate books of account are
maintained, otherwise, the income will not be entitled to benefit of
exemption under section 11 and section 12. The cases on this issue
have already been discussed in paragraph.